The Growth of Warranty Insurance in Private Equity- backed Transactions B


Broker Perspective


Brian Hendry


Willis M&A Practice and Environmental Practice hendryb@willis.com


Since the late 1990’s warranty insurance has increasingly featured as a product solution in private equity (PE) transactions. Originally structured as a sell-side product to provide the management warrantors with comfort against claims under the warranties, in 2002 it also developed into a buy-side insurance product which is now commonly utilised internationally in mid-market private equity exits to provide buyers with warranty protection and security.


Brian Hendry is a senior member of the Willis M&A Practice and Environmental Practice. He has specific responsibility for the Willis M&A Transaction Solutions insurance team and is leader of the International Environmental Practice. He is a career insurance broker with over 25 years’ experience, the latter of which has been focused on Transaction Solutions Insurance and Environmental Insurance placements.


Since specialising in M&A Transaction Solutions and Environmental Insurance, Brian has been involved in projects that cover most sectors and most regions around the globe and has structured policies to address deal breaking issues ranging from complex tax structures to contingent litigation exposures to operational environmental cover to address emerging environmental law.


Brian Hendry, head of the Willis Transaction Solutions team and with over 12 years of broking experience in the field recalls “The sell-side warranty insurance product didn’t fit the requirements of the private equity deal, where there was a gap between the level of warranties a seller could provide and the buyers’ expectations of warranty comfort. The real turning point was the advent of the buy-side insurance policy structure”. However, in 2002–2004, premium rates were considered high and the process involved to arrange a policy was perceived as cumbersome and prohibitive.


From 2004, significant changes took place in the warranty insurance market, the major international brokers all started to build their M&A teams and insurers expanded their capability and underwriting teams predominantly in London and New York. Both brokers and insurers started recruiting corporate lawyers with experience of drafting sale and purchase agreements, who challenged some of the gaps between the policy and the traditional warranty protection package offered under a sale and purchase agreements.


Between 2004–2008, Chartis (previously AIG) built their European practice initially in Paris, Frankfurt, Stockholm – mainly focused on underwriting warranty insurance on transactions involving private equity houses. Not only would these transactions potentially have features where there would be a demand for protection from the private equity industry but typically involved detailed due diligence and investment in the management teams which improved the risk profile of the transactions in which the insurers were underwriting. This remains


the principal objective for insurers entering new territories, and last year saw transactions written and the opening of underwriting offices in the Middle East and Asia.


Other insurers such as Ambridge, (a managing agent, backed by Lloyds underwriters and CNA Insurance) based in New York with a London office took a different growth strategy and focused on tax insurance alongside warranty cover. Ambridge is now highly regarded in providing one-off product solutions for tax and contingent M&A risks.


However, by 2008 capacity was still limited, therefore demand was restricted to deals up to £100–£200 million enterprise value where limits of £30–£50 million were required. Since 2008, there has been a quadrupling of the number of insurers involved in underwriting primary warranty insurance and the capacity has now reached over £200 million on any one transaction. The table opposite highlights the current capacity, with further excess insurers in London, New York and Bermuda enabling a significant programme to be built to cater for the £1 billion plus transaction requirements.


In 2011, most established insurers had a three-fold increase in gross written premium with a significant proportion of this (30–40%) emanating from the Asia/Pacific region with demand in Australia from private equity funded transactions dominating growth. This was principally driven by private equity deal activity and demand for buy-side warranty insurance where the seller retained little or no residual warranty risk.


34 Author Viewpoint


Risk and Insurance in Private Equity and M&A 2012/13


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60  |  Page 61  |  Page 62  |  Page 63  |  Page 64  |  Page 65  |  Page 66  |  Page 67  |  Page 68  |  Page 69  |  Page 70  |  Page 71  |  Page 72  |  Page 73  |  Page 74  |  Page 75  |  Page 76